This week we had the oportunity to meet Hispanic homeowners who spoke very little english who wanted their home valued. I and a Spanish speaking Realtor met with them and told them that their home was worth $240,000. The mortgage on their home is $262,000 with $1180 per month payments.
Since that did not compute I examined the mortgage documents and discovered they had been paying less than the interest and their payments were about to increase to $2450pm. We further asked where they got the $14,000 to put down and they said that they put a second mortgage on their other home and rented it. The rent barely covered the payments and when I understood the terms of the other two mortgages it transpired that the first had increased from $181,000 to $195,00 and both mortgages were soon to go to a greatly increased payment schedule. The home is worth perhaps $200,000.
Did they understand what they were getting into? My belief is No and Yes. They obviously did not know the details of the mortgages and the Hispanic Realtor who represented them did not attempt to do so. The Realtor just told them to refinance at their convenience. On the other hand they bought two house with no cash of their own, lived in one at a greatly reduced monthly cost and will probably face no consequences. If things had worked out that they were at the top of the Ponzi scheme they would be well off now. Looking at it like that they were cynical but not dumb. They have already worked out that their best bet is to buy a trailer in a park with the money they have saved up!
But the banks! The second mortgage is with a defunct sub prime lender but the two first are with major banks. These loans were the result of such bad practice I am not going to feel sorry for them. The $22,000 2nd is 100% gone. The $195,000 on the rental will lose about $15,000 and the $262,000 1st of the house they're living in will lose about $40,000.
Your tax money at work!